Basis And The Tax Consequences Of The Dispositions Of Property: Section 1231 And Recapture Provisions

Question 1

Section 1231 assets

If a business is disposing of depreciable and/or real property, how are losses gains treated

Answer 1

Any loss is treated as an ordinary loss deductible for adjusted gross income

Gains and losses on the sale of qualified section 1231 property or given long-term capital gains treatment and all such gains and losses in the tax year are netted

If netting results in a loss, the loss is considered and ordinary loss deductible for adjusted gross income

Question 2

What is section 1245 recapture?

Answer 2

Requires any recognized gain to be treated as ordinary income, to the extent of depreciation taken on the property disposed of up to the gain recognized, it does not apply if the property is disposed of at a loss

Question 3

Section 1245 recapture

Bought a depreciable business asset for $75,000. Before selling it for $60,000 he was able to write off $45,000 in depreciation. In accordance with section 1245 rules, Blaine has to treat the entire gain on the sale of the business as ordinary income. How did you arrive at section 1231 gain?

Answer 3

Question 4

What is section 1250 recapture?

Answer 4

Prevent taxpayers from receiving benefits of both depreciation and long-term capital gains treatment and requires the recapture of depreciation

Gains on the sale of section 1231 real estate attributed to straight line. Appreciation are referred to as recaptured section 1250 capital gain and taxed at a maximum rate of 25%

Yes, taxpayers marginal rate is less than 25%. The section 1250 game will be taxed at the lower rate.

Question 5

What is section 1250 property?

Answer 5

Depreciable real property (buildings and structural components) used in a trade or business

Question 6

How are section 1250 recapture losses treated

Answer 6

Losses do not have depreciation recapture and are usually treated as section 1231 losses

Question 7

How are section 1250 recapture long-term gains treated

Answer 7

Any long-term gain, not a tributable to depreciation is subject to the taxpayers, long-term capital gain rate

Question 8

Pam, a single taxpayer, sold a building on June 15 for $100,000. Pam’s income is $250,000. She had acquired the building more than five years earlier for $75,000 straight line appreciation taken was $30,000. What is the character of her gains?

Answer 8

Character of her gain is $30,000 at the 25% rate and $25,000 at the 15% rate.

The uncaptured section 1250 game is taxed at the 25% capital rate and the remaining long-term capital gains receives a 15% rate

Question 9

Recapture under section 1245 and 1250 does not apply to the following

Answer 9

Gifts - recapture potential carries over to the Don

Death - as it receives, stepped up, no recapture to heirs

Charitable transfers - amount of depreciation reduces the amount of charitable contribution deduction

Like kind exchanges - remaining recapture potential carries over to the real property received and may be recognized to the extent of any boot received

Involuntary conversions - any remaining recapture potential carries over to the property received

Question 10

How was recognized gain treated when the sale or exchange of depreciable property occurs between certain related parties

Answer 10

Recognize gain treated as ordinary income